MAY 2011

FLOW-THROUGH SHARES
Viewpoints:
Applying IFRSs in the Mining Industry

Mining Industry
Background
Task Force
Current Canadian tax legislation permits mining entities to
issue flow-through shares to investors. Flow-through shares on IFRSs
are securities issued to investors whereby the deductions for
tax purposes related to resource exploration and evaluation
Canada’s move to International
expenditures (expenditures) may be claimed by investors instead
of the entity, subject to a renouncement process. Financial Reporting Standards
(IFRSs) creates unique challenges
Renouncement may occur:
for junior mining companies.
• prospectively (i.e., the flow-through shares are issued,
Financial reporting in the sector
renouncement then occurs and eligible expenditures are
incurred subsequently); or is atypical due to significant
differences in characteristics
• retrospectively (i.e., the flow-through shares are issued, eligible
expenditures are then incurred and renouncement occurs between junior mining companies
subsequently). and other types of companies. The

IFRSs do not specifically address the accounting for flow- Canadian Institute of Chartered
through shares or the related tax consequences arising from such Accountants (CICA) and the
transactions. Pre-changeover accounting standards, however, Prospectors and Developers
addressed the accounting for flow-through shares in Section
Association of Canada (PDAC)
3465, Income Taxes, and EIC-146, Flow-through Shares.
created the Mining Industry Task
Force on IFRSs to share views on
ISSUE
IFRS application issues of relevance
How are flow-through shares accounted for under IFRSs? to junior mining companies. The
task force’s views are provided in a
VIEWPOINTS series of papers that are available
through free download. These views
The issue of flow-through shares is in substance:
are of particular interest to chief
• an issue of ordinary shares; and financial officers, controllers and
• the sale of tax deductions. auditors.

The sale of tax deductions may be measured using either the The views expressed in this series
residual method or the relative fair value method. At the time
are non-authoritative and have
the flow-through shares are issued, the sale of tax deductions
is deferred and presented as other liabilities in the statement of not been formally endorsed by the
CICA, PDAC or the organizations
represented by the task force
members.
APPLYING IFRSs IN THE MINING INDUSTRY
FLOW-THROUGH SHARES

financial position because the entity has not yet fulfilled its obligation to pass on the tax deductions to the
investor. When the entity fulfills its obligation:
• the sale of tax deductions is recognized in the income statement as either other income or a reduction of
deferred tax expense (however, some are only of the view that the sale of tax deductions is recognized in
the income statement as other income); and
• a deferred tax liability is recognized, in accordance with IAS 12, Income Taxes, for the taxable temporary
difference that arises from the difference between the carrying amount of eligible expenditures capitalized
as an asset in the statement of financial position and its tax base1.
If renouncement is prospective, the obligation is fulfilled when eligible expenditures are incurred. If
renouncement is retrospective, some are only of the view that the obligation is fulfilled when eligible
expenditures are incurred as long as there is the intention to renounce, some are only of the view that the
obligation is fulfilled when the paperwork to renounce is filed and some find either view acceptable.
It is important to note that the renouncement of expenditures related to flow-through shares may lead to the
recognition of previously unrecognized deferred tax assets.

Appendix

Journal Entries to Account for Flow-through Shares

PCP Ltd. is a publicly traded Canadian mining entity that prepares its financial statements in accordance with
IFRSs.
Assume that:
• PCP Ltd. received $100 from the issue of flow-through shares on December 1, 2011;
• the fair value of PCP Ltd. ordinary shares is $90 on December 1, 2011;
• PCP Ltd. renounced with an effective date of December 31, 2011, but filed the paperwork to renounce on
January 31, 2012;
• PCP Ltd. incurred eligible expenditures of $100 (on February 12, 2012 for the purpose of illustrating
prospective renouncement and, on December 11, 2011 for the purpose of illustrating retrospective
renouncement), which were capitalized; and
• the tax rate applicable to PCP Ltd. is 30%.

1 – Issue of Ordinary Shares and Sale of Tax Deductions

The sale of tax deductions is measured at $10. In this particular case, the residual method [$100 - 90] and the
relative fair value method [($100 - 90) x 100 / $100] produce the same result.
Therefore, the journal entry on December 1, 2011 to record the issue of ordinary shares and the sale of tax
deductions is:
Dr. Cash (statement of financial position) 100
Cr. Share Capital (statement of financial position) 90
Cr. Other Liabilities (statement of financial position) 10

1 With respect to retrospective renouncement, some have an alternative interpretation of the Canadian Income Tax Act in which eligible
expenditures are deemed to never have been incurred. Under this interpretation, the initial recognition exception in IAS 12 would apply
and the deferred tax liability would never be recognized.

MAY 2011 2
APPLYING IFRSs IN THE MINING INDUSTRY
FLOW-THROUGH SHARES

2 – Capitalization of Eligible Expenditures

The journal entry to capitalize eligible expenditures is:
Dr. Capitalized Eligible Expenditures (statement of financial position) 100
Cr. Cash (statement of financial position) 100

3 – Fulfillment of Obligation and Recognition of Deferred Tax Liability

The journal entry to record the fulfillment of the obligation to pass on the tax deductions is:
Dr. Other Liabilities (statement of financial position) 10
Cr. Other Income or Deferred Tax Expense (income statement) 10
The deferred tax liability is measured at $30 [($100 - 0) x 30%].
The journal entry to recognize the deferred tax liability is:
Dr. Deferred Tax Expense (income statement) 30
Cr. Deferred Tax Liability (statement of financial position) 30
If renouncement is prospective, these journal entries are booked on February 12, 2012.
If renouncement is retrospective, these journal entries are booked on:
• December 11, 2011 if the view is that the obligation is fulfilled when eligible expenditures are incurred as long
as there is the intention to renounce; and
• January 31, 2012 if the view is that the obligation is fulfilled when the paperwork to renounce is filed.

MAY 2011 3
APPLYING IFRSs IN THE MINING INDUSTRY
FLOW-THROUGH SHARES

The Mining Industry

Task Force on IFRSs

Members
Ronald P. Gagel, CA (Chair) Blake Langill, CA
Prospectors and Developers Association Ernst & Young LLP
of Canada Toronto, Ontario
Toronto, Ontario
Janet Stockton, CA
Susan Bennett, CA BDO Canada LLP
Deloitte & Touche LLP Toronto, Ontario
Toronto, Ontario
Sean Cable, CA Staff
PricewaterhouseCoopers LLP Andrée Lavigne, CA
Toronto, Ontario Canadian Institute of Chartered Accountants
John S. Cochrane, CA Montreal, Quebec
Raymond Chabot Grant Thornton LLP John Tang, CA, MAcc
Montreal, Quebec Canadian Institute of Chartered Accountants
Lee Hodgkinson, CA Toronto, Ontario
KPMG LLP
Toronto, Ontario

For more information on IFRSs visit:

www.cica.ca/IFRS

MAY 2011 4